How does the correlation between two stocks change the level of benefit that diversification given when combining the stocks into a portfolio? What does it means to say that there is a bigger benefit of combining these assets if they have a smaller correlation?

How does the correlation between two stocks change the level of benefit that diversification given when combining the stocks into a portfolio? What does it means to say that there is a bigger benefit of combining these assets if they have a smaller correlation?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6QTD

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How does the correlation between two stocks change the level of benefit that diversification given when combining the stocks into a portfolio?

What does it means to say that there is a bigger benefit of combining these assets if they have a smaller correlation?

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Define the terms covariance and correlationcoefficient. How are they related to one another,and how do they affect the required rate of returnon a stock? Would correlation affect its requiredrate of return if a stock were held (say, by the company’s founder) in a one-asset portfolio?
Why is it preferred to have assets with negatively correlated returns in a well-diversified investment portfolio?
Why are the returns of sustainable stocks and traditional stocks different?
Consider the stocks in the table with their respective beta coefficients to answer the following questions:a. Which of the assets represents the most sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have if you add it to an investment portfolio in a higher proportion than all other assets? b. Which of the assets represents the least sensitive to fluctuations or changes in market returns and why? What impact in terms of risk and return would this asset have, if you add it to an investment portfolio in a greater proportion than all other assets? Stock Beta SKT 0.65 COST 0.90 SU 1.42 AMZN 1.57 V 0.94
Is stock price maximization good or bad forsociety?
What happens if someone is not given the Beta for a stock that they are analyzing? Will they still be able to find the required rate of return using the capital asset pricing model?
According to the capital asset pricing model (CAPM), which of the following statements is true (only of them is): (a) A share with more total risk should provide a higher return than one with less total risk. (b) A share with more idiosyncratic risk should provide a higher return than one with less idiosyncratic risk. (c) A share with more systematic risk should provide a higher return than one with less systematic risk. (d) Only a share with no risk (either systematic or idiosyncratic) should pay the risk free rate. (e) The expected market return is the appropriate discount rate of risky projects.
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Is it still worth it to know about common stock valuation if there is already an efficient market hypothesis?
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Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.
Do you think we still need to study common stock valuation, given the Efficient Market Hypothesis? Why or why not?